More business owners retire part-time

By Matthew Heimer

For the owners of America’s 23 million small businesses, retirement may seem like a relatively straightforward prospect: You reach your chosen retirement age; you sell, shut down or hand over the reins to the company; you move on to whatever comes next. But for boomer business owners, that transition is now increasingly likely to be a phased succession in which the owner keeps a part-time role and a significant financial stake in the business for several years.

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Handing off the business, but staying in the game.

This entrepreneurial limbo has a lot to do with the growing popularity of seller financing, an arrangement in which the seller essentially agrees to let the buyer purchase all or part of the business over time instead of all at once. As Lisa Ward writes this week in The Wall Street Journal, seller financing has grown more common by necessity, because an iffy economy and stingy credit markets have made it harder for would-be buyers to finance the entire cost of an acquisition up front.

A typical seller-financing deal might result in the buyer paying the owner, say, 70% of the purchase price at sale time, with the remaining 30% paid in installments over time, assuming the business stays viable. This arrangement isn’t ideal for owners who are ready to retire, since they can’t realize the full value of their business right away. But taking a smaller payment upfront, with later payments down the line, could help some owners reduce the tax hit on the sale.

What’s more, a seller-financed transition can be a boon for an owner who would rather move into part-time work than give up the business altogether. Ward reports that many selling owners arrange financing deals that allow them to continue to work part-time at the company, with considerable decision-making authority, until the purchase is fully paid off. (Presumably, some of these part-timers negotiate for compensation on top of their financing payments–another way to make their business equity stretch further into retirement.)

The big risk, of course, is that the buyer will run the firm into the ground before the seller collects full value. With that in mind, some sellers negotiate a takeover clause — one that lets them reassume ownership of the business if the buyer misses a payment.

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About Encore

Encore looks at the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities, needs and priorities of people saving for and living in retirement. Our lead blogger is editor Matthew Heimer, and frequent contributors include editor Amy Hoak, writer Catey Hill, and MarketWatch columnists Elizabeth O’Brien, Robert Powell and Andrea Coombes. Encore also features regular commentary from The Wall Street Journal retirement columnists Glenn Ruffenach and Anne Tergesen and the Director of the Center for Retirement Research at Boston College, Alicia H. Munnell.